Back in March 2014, I first wrote about FBARshttps://www.mooresrowland.tax/2014/03/dont-forget-those-fbars-aka-fincen-114.html
But my recent interaction with clients suggests that I need to revisit
Each U.S. citizen and permanent resident must report worldwide income
to the IRS even when paying taxes elsewhere. Moreover, you must file an annual
FBAR(now called FinCEN Form 114) disclosing your foreign bank accounts if their
aggregate value exceeds $10,000 at any point during the year. The penalties for
either failure are big, potentially even criminal. FBAR penalties are even
worse than tax evasion.
According to the FBAR instructions, U.S. persons include U.S. citizens and U.S. residents. Similarly, the FBAR regulations state that a U.S. person is a citizen of the United States or a resident of the United States, meaning “an individual who is a resident alien under 26 USC 7701(b) and the regulations thereunder.”
In the minds of so many people, FBARsare tied to FATCA. Nothing could be further from the truth. Way back before I was born, (we’re talking
about 1970 now), Congress enacted the Bank Secrecy Act, which is codified in
Title 31 (Money and Finance) of the U.S. Code. The purpose of the Bank Secrecy Act was to
require the filing of reports and the retention of records where doing so would
be helpful to the U.S. government in carrying out criminal, tax and regulatory investigations.
One of the most important provisions of the Bank Secrecy Act was
Section 5314(a), which provides that:
[T]he Secretary of the Treasury
shall require a resident or citizen of the United States or a person in, and
doing business in, the United States, to keep records, file reports, or keep
records and file reports, when the resident, citizen, or person makes a
transaction or maintains a relation for any person with a foreign financial
A careful reading of the statute, along with a review of the applicable
regulations, reveals that Section 5314 actually has two distinct requirements:
filing FBARsand retaining certain records related to foreign accounts. With regard
to the former, the relevant regulation (i.e., 31 C.F.R. §103.24) mandates the
Each person subject to the jurisdiction of the United States (except a
foreign subsidiary of a U.S. person) having a financial interest in, or
signature or other authority over, a bank, securities or other financial
account in a foreign country shall report such relationship to the [IRS] for
each year in which such relationship exists, and shall provide such information
as shall be specified in a reporting form prescribed by the Secretary to be
filed by such persons.
With regard to the latter, the regulations contain considerable detail
concerning exactly who must retain records, what these records must contain,
when these records may be discarded, and where the records must be kept. In particular, the pertinent regulation states
Records of accounts required by § 103.24 to be reported to the [IRS]
shall be retained by each person having a financial interest in or signature or
other authority over any such account. Such
records shall contain the name in which each such account is maintained, the
number or other designation of such account, the name and address of the
foreign bank or other person with whom such account is maintained, the type of
such account, and the maximum value of each such account during the reporting
period. Such records shall be retained
for a period of 5 years and shall be kept at all times available for the
inspection as authorized by law.
Now let’s talk about the penalties a bit. An FBARviolation that is non-willful is
$10,000 per account per year. Willful—but still civil—violations can be
up to 50% of the value in a foreign account, again, per year. In a recent
Florida case, one man had to pay penalties of 150% of his offshore account. An
FBARviolation that is criminal is even worse, carrying up to 10 years in
prison. You have to file FBARs even if you are only a signatory but not a
Persons required to file the FBAR:
US persons (including
a Green Card holder, or individual who is treated as a US “resident” due to
prolonged physical presence in the US pursuant to the US tax laws) who have
ownership or control (for example, signature authority) of foreign accounts
with an aggregate value of over $10,000 in the calendar year.
Please note that a
non-US individual, who merely makes a so-called 6013(g) election in order to
file a joint tax return with their US spouse, is not treated as a US person for
purposes of filing the FBAR.
Foreign (non-US) “Accounts” required to be disclosed:
financial instruments accounts
Commodity futures or options
Accounts held in
commingled funds (mutual funds) and the account holder holds an equity interest
in the fund
Foreign life insurance
or annuities with cash surrender value
bonds, notes, stock certificates, and unsecured loans are not “accounts”
Many mistakes are made with FBAR filings, the most common being:
Many persons are under
the mistaken belief that if one has several overseas accounts and a particular
account is not over $10,000 then that account does not have to be reported.
This is incorrect. Remember if the highest aggregate value of all of the
foreign accounts on any day in the tax year is over $10,000, then all accounts
must be reported on the FBAR.
Another common mistake
arises when an account beneficially belongs to another person. In this case it
is often erroneously believed that the nominee does not need to report that
account on an FBAR. This is incorrect; the nominee must still file the FBAR if
the dollar threshold is met by the nominee.
Other mistakes involve
an improper understanding about what must be disclosed on the FBAR – for
example foreign mutual funds or foreign life insurance / foreign annuity with a
cash surrender value.
Don’t Forget Schedule B
Even if you do not have enough dividend or
interest income to require filing of Schedule B with your tax return, US
taxpayers filing Form 1040 are required to check a box on Schedule B, Part III,
indicating whether they have an interest in or signature authority over a
financial account in a foreign country. Make sure this question and its
follow-up are answered both accurately and completely.
The FBAR form must be
received by the Department of the Treasury no later than 30 June following the
calendar year for which the interest in a foreign account is reported.
Unlike with income tax returns, the date of mailing the FBAR is not the
date governing timeliness of filing. The FBAR is not considered “filed” until it is actually received
by the Department of the Treasury in Detroit, MI.
Commencing July 1, 2013
FBARs must be filed online at the Banking
Secrecy Act (BSA) E-Filing website.
Do not simply use an Internet
search engine to ascertain where to e-file your FBAR as these may lead you to
third party online businesses offering FBAR e-filing services. It is
recommended that you use the official Banking Secrecy Act website of the US
Treasury, above. You will be required to complete a user
Other Important Points / Getting FBAR Help
The FBAR form is not to be attached to any tax return. It must be
filed (assuming the requisite conditions are met) even if the individual is not
under an obligation to file an income tax return.
FATCA and Form 8938
The Foreign Account Tax Compliance Act (FATCA) of 2009/2010 did introduce an additional reporting requirement. Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. There are serious penalties for not reporting these financial assets (as described below). This FATCArequirement is in addition to the long-standing FBAR requirement.
FATCAwill also require certain foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The reporting institutions will include not only banks, but also other financial institutions, such as investment entities, brokers, and certain insurance companies. Some non-financial foreign entities will also have to report certain of their U.S. owners.
Therefore, if you set up a new account with a foreign financial institution, it may ask you for information about your citizenship.
Reporting by U.S. Taxpayers Holding Foreign Financial Assets
FATCArequires certain U.S. taxpayers who hold foreign financial assets with an aggregate value of more than the reporting threshold (at least $50,000) to report information about those assets on Form 8938, which must be attached to the taxpayer’s annual income tax return. The reporting threshold is higher for certain individuals, including married taxpayers filing a joint annual income tax return and
certain taxpayers living in a foreign country (see below).
There are some exceptions to the requirement that you file Form 8938. For example, if you do not have to file a U.S. income tax return for the year, then you do not have to file Form 8938, regardless of the value of your specified foreign financial assets. Also, if you report interests in foreign entities and certain foreign gifts on other forms, you may just list the submitted forms on Form 8938, without
repeating the details.
Reporting thresholds vary based on whether you file a joint income tax return or live abroad. If you are single or file separately from your spouse, you must submit a Form 8938 if you have more than $200,000 of specified foreign financial assets at the end of the year and you live abroad; or more than $50,000, if you live in the United States. If you file jointly with your spouse, these thresholds double.
You are considered to live abroad if you are a U.S. citizen whose tax home is in a foreign country and you have been present in a foreign country or countries for at least 330 days out of a consecutive 12-month period. Taxpayers living abroad. You must file a Form 8938 if you must file an income
tax return and:
- You are married filing a joint income tax return and the total value of your specified foreign financial assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year. These thresholds apply even if only one spouse resides abroad. Married individuals who file a joint income tax return for the tax year will file a single Form 8938 that reports all of the specified foreign financial assets in which either spouse has an interest.
- You are not a married person filing a joint income tax return and the total value of your specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year.
Taxpayers living in the United States. You must file Form 8938 if you must file an income tax return and:
- You are unmarried and the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year
- You are married filing a joint income tax return and the total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
- You are married filing separate income tax returns and the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
For purposes of calculating the value of your specified foreign financial assets in applying this threshold, include one-half the value of any specified foreign financial asset jointly owned with your spouse. However, report the entire value on Form 8938 if you are required to file Form 8938.
Specified Foreign Financial Assets
Specified foreign financial assets include foreign financial accounts and foreign non-account assets held for investment (as opposed to held for use in a trade or business), such as foreign stock and securities, foreign financial instruments, contracts with non-U.S. persons, and interests in foreign entities.
There are exceptions to the reporting requirement. For example, you do not have to report the following assets because they are not considered specified foreign financial assets:
- A financial account maintained by a U.S. payor. A U.S. payor includes a U.S. branch of a foreign financial institution, a foreign branch of a U.S. financial institution, and certain foreign subsidiaries of U.S. corporations. Therefore, financial accounts with such entities do not have to be reported.
- A beneficial interest in a foreign trust or a foreign estate, if you do not know or have reason to know of the interest. If you receive a distribution from a foreign trust or foreign estate, however, you are considered to have knowledge of your interest in the trust or estate.
- An interest in a social security, social insurance, or other similar program of a foreign government.
- Other Exceptions from Reporting
- If you reported specified foreign financial assets on other forms, you do not have to report them a second time on Form 8938. These include interests in
- trusts and foreign gifts reported on Form 3520 or Form 3520-A (filed by the trust);
- foreign corporations reported on Form 5471;
- passive foreign investment companies reported on Form 8621;
- foreign partnerships reported on Form 8865; and
- registered Canadian retirement savings plans reported on Form 8891.
The value of the foreign financial assets reported on these forms is included in determining the total value of assets for the reporting threshold, but you do not have to list the assets on Form 8938. In this situation, identify on Form 8938 which and how many of these form(s) report the specified foreign financial assets.
Additional exceptions from reporting are made for certain trusts, certain assets held by bona fide residents of U.S. territories, and assets or accounts for which mark-to-market elections have been made under Internal Revenue Code Section 475. For example, a U.S. beneficiary of a domestic bankruptcy trust or a domestic widely held fixed investment trust is not required to report any specified foreign financial asset held by the trust on Form 8938.
The Instructions for Form 8938 provide more information on specified foreign financial assets.
You will need to determine the value of your specified foreign financial assets to know if the total value exceeds the threshold applicable to you. Generally, a reasonable estimate of the highest fair market value of the asset during the tax year is reported, but special rules apply to ease valuation burdens.
For reporting purposes, you may rely on periodic financial account statements (provided at least annually) to determine the maximum value of a financial account. For a specified foreign financial asset that is not held in a financial account, you may rely on the year-end value of the asset if it reasonably approximates the maximum value of the asset during the tax year. Special rules also apply for reporting the maximum value of an interest in a foreign trust, a foreign retirement plan, or a foreign estate.
You may determine the fair market value of a specified foreign financial asset based on information publicly available from reliable financial information sources or from other verifiable sources. Even if there is no information from reliable financial information sources regarding the fair market value of a reported asset, a reasonable estimate of the fair market value will be sufficient for reporting purposes.
For assets denominated in a currency other than U.S. dollars, use the U.S. Treasury Department’s Financial Management Service foreign currency exchange rate to convert the denomination into U.S. dollars. If no U.S. Treasury Financial Management Service foreign currency exchange rate is available for a particular currency, use another publicly available foreign currency exchange rate
to convert the value of a specified foreign financial asset into U.S. dollars. The exchange rate is determined by reference to the exchange rate on the last day of your tax year.
Non-Compliance with Form 8938 Reporting Requirements
If you must file Form 8938 and do not do so, you may be subject to penalties: a $10,000 failure to file penalty, an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40 percent penalty on an understatement of tax attributable to non-disclosed assets.
The statute of limitations is extended to six years after you file your return if you omit from gross income more than $5,000 that is attributable to a specified foreign financial asset, without regard to the reporting threshold or any reporting exceptions. If you fail to file or properly report an asset on Form 8938, the statute of limitations for the tax year is extended to three years following the time
you provide the required information. If the failure is due to reasonable cause, the statute of limitations is extended only with regard to the item or items related to such failure and not for the entire tax return.
If you make a showing that any failure to disclose is due to reasonable cause and not due to willful neglect, no penalty will be imposed for failure to file Form 8938, however. Reasonable cause is determined on a case-by-case basis, considering all relevant facts and circumstances.
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